In this data analysis project we will be focusing on the U.S. economy and its interrelationship to real estate market. We will be analyzing data from various economic indicators to analyze the health of the economy. This is also a interest of mine to better understand the US economy and why certain factors are the way they are. As I reside in Hawaii I also would like to better improve my understanding of the local economy and how that relates to the local real estate market in the islands. I also hope that this project can help others in understanding the U.S. economy and real estate market as well. I will do my best to explain various concepts in a clear and easy-to-understand way.
Project Task: This data analysis project will explore the following key questions to build a comprehensive understanding of the U.S. economy, with a particular focus on how these factors influence the real estate market nationally and in Hawaii.
a. What is inflation, and how does it impact the economy?
b. What are U.S. treasury bonds and their maturity rates?
c. How do federal interest rates relate to mortgage rates?
a. How do mortgage application rates, real estate prices, inventory levels, and Days on Market assess the health of the real estate market?
b. What does the foreclosure rate reveal about economic stability?
How do inflation, bond yields, and federal interest rates collectively influence the real estate market?
How does the national economy compare to Hawaii’s economy, and how do these differences impact Hawaii’s real estate market?
How can we identify a potential bubble in the real estate market?
How can understanding these factors help guide future real estate decisions?
The data used in this analysis was acquired from following sources. It is directly downloaded from their designated sites. All data sets are acquired from reputable source used in data analysis.
3.1 Download the libraries used to work with this data.
Housing Inventory source Zillow
Days in Market source- Zillow
Mortgage Application source- Federal Financial Institutions Examination Council
Mortgage Rate source- Federal Reserve Economic Data by St. Louis Fed
Real Estate Prices source- Realtor.com
Foreclosure Rate source 1, source 2
Household Income source- Hawaii-Federal Reserve Economic Data by St. Louis Fed and National Data by Fred
Inflation Rate source- Federal Reserve Economic Data by St. Louis Fed and source 2
Bond Market Yield Rate source- Federal Reserve Economic Data by St. Louis Fed
Personal Saving Rate source- Fred
This section outlines the steps taken to prepare the dataset for analysis. The goal is to ensure that the data is clean, properly formatted, and ready for meaningful interpretation. Each step—such as renaming columns, checking for missing values, standardizing formats, and identifying outliers—has been carefully documented in the appendix so the readers can understand and, if desired, replicate the data cleaning process themselves.
4.2 Clean up column names for proper formatting
4.3 Check to make sure all numbers are formatted correctly.
4.5 Check any missing data
4.6 Delete any rows with NA in the data
4.7 Convert necessary data to numeric
4.8 Identify outliers in the raw data.
Please see the appendix for outlier output plots at the end of this report.
Analyzing the visualization of the data, the data is within an acceptable range and does not warrant any data point deletion. Any data point that looks extreme is due to market conditions at that time, such as the 2008 recession, the COVID lockdown, and government policies that are well documented, reflecting extreme data points.
4.9 Check the unique values of each column.
4.10 check for leading and trailing white spaces.
4.11 Check and delete duplicate rows.
Inflation is the gradual increase in the prices of goods and services over time. One primary cause of inflation is the devaluation of a currency, often resulting from excessive printing of fiat money. Another contributing factor is an imbalance between supply and demand—when demand for an item exceeds supply, prices tend to rise. As inflation increases, consumers’ purchasing power is reduced because the same amount of money buys fewer goods and services. The opposite of inflation is deflation, which occurs when the prices of goods and services decrease, making items cheaper. This typically happens during a recession or when the economy is shrinking. In such situations, consumers tend to spend less, prompting sellers to reduce prices to encourage spending. While deflation may benefit consumers in the short term by allowing them to purchase more for less, it can have negative consequences for the economy. A shrinking economy often leads to reduced production, job losses, and lower overall economic growth.
The following chart is based on the Consumer Price Index dataset. It measures the average change over time in the prices paid by consumers for a basket of goods and services. CPI measures the cost of a fixed basket of goods and services that are typically purchased by urban households. Categories include food, housing, transportation, medical care, education, recreation, and more. It is calculated by collecting the prices of items in the basket, either monthly or quarterly, from various locations. A base year is chosen, and changes in prices are compared to this base year. A detailed mathematical explanation can be found here.
There are two types of CPI charts shown below. The first one includes food and energy, but due to their volatile prices, the trend line has more noise, as you can see.
5.1 CPI Index that includes food and energy source
The 2nd chart below excludes food and energy prices which produces a smoother trend line and is a reliable measure of inflationary and deflationary periods
5.1.1 CPI Index excludes food and energy source
Calculating the inflation rate, which is essentially measuring the percent change in CPI over time — usually year-over-year (YoY).
Inflation Rate (%) = [(CPI_this_year - CPI_last_year) / CPI_last_year] × 100
Economists believe a healthy inflation rate of around 2% is good for the economy. Looking at the chart below, it’s clear that the Federal Reserve has had difficulty maintaining this 2% target and was only close to that range between 2012 and the early 2020s. The chart shows that in September 2022, inflation peaked at 6.64%, the highest in recent times. Inflation began rising in February 2021 from 1.27%, most likely due to the COVID-related shutdown of the economy, which caused a recession.
Another interesting point to note is the drop in inflation from 2.93% to 0.66% in September 2006 following the real estate crash. This was the lowest it had dropped since 1961.
In the 1990s, the highest inflation rate was 5.60%. The highest recorded inflation on this graph occurred in June 1980 at 13.6%, which is due to Federal Reserve policies, deregulation aimed at combating the 1970s recession, and increases in the food, shelter, and energy components.
Looking at this graph, it seems that nearly every recession is followed by a spike in inflation, similar to the aftermath of the COVID years. This makes sense, as efforts to stimulate the economy during a recession often lead to overcorrection, causing inflation to rise too quickly.
5.1.2 Inflation Rate
Bonds are essentially loans from investors to entities such as governments or corporations, often described as IOUs. For example, 10-year Treasury bonds issued by the U.S. government have a fixed interest rate (coupon rate) that remains constant throughout the bond’s term. Investors, such as banks, often purchase these bonds as a way to earn a return on their cash while maintaining a relatively low-risk investment.
When interest rates and inflation interact, they significantly impact the bond market. If investors expect that the inflation rate over the bond’s lifetime will be higher than the bond’s fixed interest rate, the bond’s value decreases in real terms. In such cases, investors may choose to sell their bonds on the secondary market rather than hold them to maturity. To attract buyers in this scenario, the bonds are typically sold at a discounted price (below their face value), reflecting the reduced purchasing power of the fixed interest payments due to higher inflation.
The following data reflects the secondary Treasury bond market, as it represents prevailing market sentiment and expectations.
5.2 Bond market source
The following chart shows both inflation and the 10-year Treasury bond rate together. Here we can observe trends between the two and how closely they move in relation to each other. As inflation rises, the market yield rate for Treasury bonds also tends to increase, and vice versa—although not always as drastically as the inflation rate.
When investors believe that inflation will reduce their purchasing power, bonds become less attractive as an investment. As a result, in the secondary market, people may try to sell their bonds at a lower price, which in turn causes the market yield rate to increase.
Looking at the approximate formula below, Yield to Maturity (YTM) is the fraction of the yearly return over the average of the bond’s face value and market price. Mathematically, if the denominator is high, the result (YTM) is low, and vice versa.
Coupon = C Face value = F Market price = 𝑃 Maturity = 𝑛
Looking at the graph below, for every time inflation and T-bond rates are close to converging, there is an increase in bond rates—such as in September 2021, May 2016, September 1980, January 1976, and October 1971. As T-bond rates rise after these points of convergence, the inflation rate continues to drop—until it drastically increases again.
The maturity yield rate dropped significantly during the 2008 financial crisis. This reflects heightened demand for safe-haven Treasury securities as investors fled riskier assets. Inflation also fell sharply due to the global slowdown.
During the COVID era (2020s), the maturity yield rate and inflation surged from 2020 to 2022 due to: – Expansionary fiscal and monetary policies during the COVID-19 pandemic – Supply chain disruptions and energy price shocks
The Federal Reserve’s rate hikes since 2022 have pushed yields higher to combat inflation. Since inflation is high, investors are flocking to the Treasury bill for low risk—driving market prices down. And because yield is the inverse of price as mentioned in the Yield Maturity formula above, this drives the yield to maturity rate up.
5.3 CPI and T Bond relationship
Mortgage rates and the bond market are interconnected because both involve loans and interest rates. Mortgage rates are the interest borrowers pay on loans taken out to buy homes—often because they cannot pay the full price in cash. Banks, as profit-driven institutions, earn money through interest income from the mortgage loans they issue. However, banks also have other investment options, such as purchasing government bonds like Treasury bonds.
Inflation plays a critical role in these decisions. If banks expect future inflation to be higher than current levels, they may seek to protect themselves from the erosion of purchasing power. For example, if the returns from bonds (due to their fixed interest) are expected to be lower than future inflation, banks may do the following to counteract potential losses:
• Sell these bonds in the secondary market at a discount
• Raise mortgage rates to earn higher returns and shield themselves from inflation’s impact on purchasing power
5.4 Mortgage rate link
The Federal Reserve (Fed) plays a central role in managing inflation and economic stability by adjusting the federal funds rate, which is the interest rate at which banks lend to one another overnight. When the Fed lowers this rate, it typically leads to a decrease in the interest rates banks charge on loans, including mortgages. Lower interest rates make borrowing less expensive, encouraging individuals and businesses to take out loans for activities such as starting businesses or buying homes. This increased economic activity can drive demand for homes, often outpacing supply and leading to rising home prices.
Conversely, when the Fed raises interest rates to curb inflation, borrowing becomes more expensive. Higher mortgage rates discourage buyers, reducing demand in the housing market. As a result, sellers may lower home prices to attract buyers, leading to a decline in housing prices.
5.5 Interest rate data Source
As of December 2024, the Federal Reserve has lowered the federal funds rate by 50 basis points in September, followed by two 25 basis point cuts in November and December, bringing the current target range to 4.25% to 4.48%. Despite these reductions, mortgage rates remain elevated, with the average 30-year fixed rate around 7.00% as of late December. This persistence in high mortgage rates may indicate that investors expect future inflation to remain elevated, influencing long-term Treasury yields and, consequently, mortgage rates.
The following chart shows all percentages: mortgage rate, federal interest rate, 10-year Treasury bills, and year-over-year inflation rate. Notice that the mortgage rate is higher, as it represents long-term borrowing costs that include additional risk premiums.
##Economic Rate Comparison